DATA
AND MARKETS UNANIMOUSLY SUPPORT
THE CURRENT DEPRESSION PHASE OF THE LONGWAVEby Jas JainJuly 4, 2005

Regrettably, most
Americans, who take interest in the economy and investments, and most
economists are ignorant of the economic Longwave, also known as the
Kondratieff Wave, but Greenspan is not one of them. Greenspan is
supposed to have said that he would love to be the Fed Chairman during
the coming Kondratieff winter, or the Deflationary Depression phase of
the Longwave, a wish that did come true. Aren�t we Americans lucky?

What Is the Longwave
Depression?

A long interval, or
period, during which the growth rate of the economy is 2-3% per year
lower than the preceding growth period, i.e., the economic activity is
significantly depressed for a long period. The last Longwave Depression,
obviously, was the Great Depression, which lasted for approximately 20
years; though, the worst of the GD was before the US entered the WW II.
Just imagine a 2-3% a year fall in the growth rate for 10-12 years and
that gives you some idea as to how it feels despite the fact that
overall the economy keeps growing over that period. THE US GDP GREW AT
AN ANNUAL RATE OF 2.83% A YEAR BETWEEN 1930 AND 1941! I don't have the
exact number, but the GDP growth rate during the preceding growth
period, 1920Q2-1929Q2, approximately, was in excess of 5% a year; and
could well have been close to 6% a year.

The worst of the
Deflationary Depression phase takes place when the Private Debt begins
to liquidate, by force if not by volition. The most damaging interval
for the economy takes place when the Consumption Debt (yes, home
mortgage debt is Consumption Debt) starts declining because it directly
affects the demand side, which in turn affects the employment and
creates the snowball effect. It is not being recognized now, but in a
low, or negative, inflationary environment paying down debt, for those
who are close to the limit of debt that they can handle, is a very
painful process. Unfortunately, it will be forced upon households that
are way above their heads in debt.

Various Phases of
the Longwave and the Summary of the Current Longwave

One of the tests of a
scientific theory is its ability to predict the future outcomes. The
first two columns in the table below are the pre-known, or predictable,
aspects of the Longwave. What is not predictable beforehand are the
turning points and nor are the turning points very precisely
identifiable. Therefore, one cannot precisely time investments, for
example, in stocks versus the highest quality bonds, but one knows what
lies ahead, i.e., what investments will do well, long-term, during the
various phases.

Longwave
Phase

Investment
Performance

Current
Longwave

Real
GDP
Growth
Rate

Stocks

Tr.
Bonds

Period

Years

Non-Inflationary
Growth

Great

OK/Poor

1950Q1-1966Q1

16.25

4.58%

Inflationary
Recession

Poor

Poor

1966Q2-1982Q4

16.75

2.61%

Disinflationary
Growth

Great

Good

1983Q1-2000Q2

17.50

3.73%

Deflationary
Depression

Poor

Good

2000Q3-2005Q1

cont.

2.53%
--> 1%

Source:
Jas Jain, 07/04/05

From the first three
rows of the above table it should be clear that the Longwave theory has
passed the test of a scientific theory with flying colors. There is some
time lag between the investment performance and the economic performance
indicated by the Longwave, with the former being the leading indicator
by 6 to 18 months (between the bond market and the stock market, the
former has the longer lead time).

As the table indicates,
the growth rate of the economy during the current phase of the Longwave
is only 2.53%, 30 basis point below the growth rate during the worst 12
years of the Great Depression. Also, in terms of the employment and real
wage growth for workers, the current recovery is the worst ever recorded
in the US. The best explanation is that this be because we are in the
Deflationary Depression phase of the Longwave, or in the Kondratieff
winter.

However, the best
support for the Deflationary Depression phase comes from the financial
markets. ONLY DURING THE DEFLATIONARY DEPRESSION PHASE THE HIGHEST
QUALITY BONDS, E.G., TREASURIES, OUT-PERFROM STOCKS FOR A LONG PERIOD OF
TIME. For the past 8 years, the long-term US Treasury bonds have
out-performed the major stock indexes. The 2017 US Treasury STRIP that I
purchased in 1997Q3 is up 110%, handily out-performing the S&P 500
in total return. Please note that 8 years ago the US stocks were not in
the bubble phase; stocks were over-valued but bonds were not undervalued
either.

If we limit ourselves
to a shorter time frame, the markets are screaming Deflationary
Depression. Four years ago, on July 3, 2001, the economy was in a
recession and the S&P 500 closed at 1234.45. On the last trading day
before the July 4, 2005 holiday, the economy has been in a recovery for
44 months and the S&P 500 closed at 1194.44. During the same four
years, the long-term US Treasuries have gone up in price nicely and have
yielded 2.5 times! This, stocks doing worse during a recovery compared
with the recession and bonds doing better, never happens except during a
Deflationary Depression phase. Only a gullible fool listens to
economists over the markets.

The most important
conclusion to be drawn from the market performance is that the markets
look ahead; hence, the Deflationary Depression is more likely to be in
the future than in the past.

How Come We Don't See
the Signs of Outright Deflation and Depression Yet?

Good question, but
there is a very simple explanation. In any given phase, the defining
characteristic of that phase does not have to be at the beginning. In
the Inflationary Recession phase, for example, the worst is more likely
to be at the end from the nature of that phase. Since the Deflationary
Depression of the previous Longwave lasted lot longer than the preceding
growth phase, it is probable that the current Deflationary Depression
could last anywhere from 15 years to 35 years. We are only in the first
5 years of the Deflationary Depression phase and we have lot of time for
outright deflation and outright depression to take place that no one
would be able to deny. What is the hurry? And for those of us whose
investments are positioned for Deflationary Depression, the best is yet
to come. Sorry, but economic forces are too powerful for Greenspan, or
any other span, to be able to avert. We must position ourselves as best
as we can from the knowledge of history. The only thing a political hack
like Greenspan can do is to postpone the inevitable and make
matters worse. And that he has already done before his departure.

To buttress the above
point, if you recall your history of recessions and recoveries you will
notice that there were some sharp contractions during the two growth
phases and good recoveries during the recession phase. Counter trends
are normal and always take place during any of the four phases of the
Longwave. And they sure fool lots of people.

The worst period during
any phase only lasts for 12 to 36 months, even though the phase could be
20 years long, as was the case during the Great Depression. The WW II
led recovery during the Great Depression was the best ever recorded in
the US, but the economy fell into depression after the war economy was
withdrawn. One reason that we have not had the worst yet is that this
phase is likely to be lot longer due to greater distortions in the
economy that lead to the Deflationary Depression in the first place. It
is the cleansing phase for the economy. Doesn�t it feel good when one
gets rid of all the garbage and junk accumulated over a long period of
time? The junk in the case of the US economy has a name that start with
d and ends in t. The worst will come when the Private Debt starts to
shhhhrrrrrink. Wouldn't it feel good for 5'7" Amerique Conman, the
symbol of the US economy, to go from 390 lb. to 110 lb. and lose all
that flab?

When the Chief
Economist for the Wall Street firm with the big bad bull symbol says,
�Play It Safe!,� it pays to heed the advice.